Do You Want to Know a Secret?

Were you - like me - ever amazed at how so many people could afford bigger and
bigger homes, New England beach houses and Florida condos, expensive
cars? The answer, according to a terrific article by Ben Funnell in the Financial Times, is simple: cheap, available credit.

Debt, he says, is "capitalism's dirty little secret." Cheap mortgages, cheap car leases, and the use of home as veritable ATM's created fictitious living standards for the middle class and the bulk of the population at a time of low productivity and paltry growth in incomes, and where the bulk of the gains in wealth were scooped up by the top fraction of households.

Put simply, the benefits of economic growth have gone
into the pockets of plutocrats rather than the bulk of the population.
So why has there been no revolution? Because there was a solution:
debt. If you couldn't earn it, you could borrow it. Cheap financing was
made widely available. Financial innovations such as the asset-backed
securities market aided this process, as did government-sponsored
agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all
while perhaps taking insufficient account of the moral hazard problem
it posed: that ever-increasing leverage meant the authorities had to
keep interest rates low, otherwise the debt burden would cripple
consumption. This prompted more leverage, which exacerbated the problem.

Many of those houses have now been lost - "owners" turned into renters. The new Bimmers and Benzes traded in for used Toyotas. It will be a long and painful readjustment for much of America as we head toward a new normal.

Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He isdirector of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU.
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